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Compliance and PI cover: A pension transfer specialist tells all

Jake Raj is a problem solver. It’s the aspect of advice he relishes, and for him it plays a big part in what makes giving advice so interesting.

Like many advisers, Jake has been on the crest of several waves of change in the advice market, from supervision under the Personal Investment Authority (the precursor to the FSA and FCA), to the rollout of the financial planning certificate qualifications and the RDR.

As a pension transfer specialist and director at Tuto, a firm which offers a bureau service for advisers, Jake is arguably now subject to waves of a very different nature – the shockwaves that have reverberated around defined benefit (DB) pension transfer advice.

The developments we have seen over the last year, and in particular the shocking tales from steelworkers and the FCA’s consequent rule-making, have meant pension transfer advice is all about problem-solving, and crucially, going far beyond the question of whether to transfer or not. It’s a role where Jake has come into his own.

A south London apprenticeship

Jake’s financial services career came about after an epiphany moment, where he found himself shooing pigeons out of a warehouse at 11pm. He was deputy manager of a pet store at the time, and that was the moment he (understandably) decided this wasn’t the life for him.

His first job was as an entry level salesman for Royal London. He says: “I was giving a patch of south London to look after, which was quite an apprenticeship. I dealt with interesting people, and learned I had to speak on their terms from the outset otherwise I’d be kicked out the door.

“I found it was all about having empathy and understanding what the person you’re speaking to is trying to do, alongside what you feel they should do.”

From there he went into bancassurance, and saw first-hand the transition as Midland Bank was subsumed into HSBC. Jake joined as a mortgage and protection adviser in 1999, which he describes as “the end of the ‘branch manager as God’ era.”

Building societies were all about doing what was right for the client. Unfortunately, that changed when building societies started recruiting from the banking sector. Aspects of that poor culture got imported in.

He says he didn’t feel the high pressure, sales-led culture the banks went on to become known for. But he did detect a shift in the Midland Bank culture as time went on, not so much on the advice side of things but with customer advisers increasingly targeted on selling add-on products like insurance.

He grew to enjoy being an adviser. “That was my lightbulb moment really – I started to understand these clients didn’t just need a mortgage. Yes they needed financial help with buying somewhere to live, but they also needed help with thinking about what happens financially when they die. That led me to the problem-solving aspect of advice, and that was the interesting bit for me.”

In pursuit of proper financial planning

Jake moved out of London to Market Harborough, and realised that what he wanted to do was give independent financial advice.

At the time Norwich & Peterborough Building Society was about to launch an IFA arm, and Jake thought this would be his foot in the door to independent advice. He joined and moved from advice on mortgages and protection to savings and investments.

“The banks were becoming more focused on the hard sell, while building societies were all about doing what was right for the client. Unfortunately, that changed when building societies started recruiting executives from the banking sector. I think aspects of that poor culture got imported in.

“The culture changed from giving impartial advice to providing access to this ground-breaking, brilliant Keydata product. In hindsight, there was a lack of experience and naivety, and a failure to ask the right questions in terms of whether this product was really that good.”

It struck Jake that as is often the case in financial services, memories are short. A couple of years before he joined N&P, major providers were offering annual bonuses of 8 per cent on with-profits policies. By the time he started, issues around market value reductions (MVRs) had begun to bite, with traditional building society clients who had with-profits policies finding they weren't paying out.

It wasn’t long before history repeated itself. Investments in Keydata were promising income of 7.5 to 8 per cent a year, and were sold to 3,200 N&P customers. Following Keydata’s collapse, N&P was found to have missold the products and had to pay out £51m in compensation, plus a £1.4m FSA fine. It was taken over by Yorkshire Building Society in 2011.

Jake was there as N&P started selling Keydata, but left in 2008. “I thought best to leave them to it.”

He had grown disillusioned with serving clients who already had an IFA, and who had only been told to speak to their building society about one particular part of their finances. Jake felt if he was only looking after one particular aspect of clients’ financial lives, he wasn’t solving the whole problem.

He spent a year while at N&P looking for the right opportunity to join a firm that looked after clients in a more comprehensive way. He found what he says was “the perfect place”, an accountancy practice in Leamington Spa called Burgis & Bullock which focuses on holistic financial planning. He joined the practice, only to be made redundant nine months later as a result of the financial crisis.

Jake believes in an ideal world advisers would be recession-proof, as it can be in the worst times when they demonstrate their value. Sadly in this case, the reality did not match up to the ideal.

With the financial crisis in full swing, the last thing on firms’ minds was recruitment. And so it was that Jake found himself as a self-employed IFA with no client bank. He initially joined a firm called Ashwood Law, but didn’t get on well there and moved to another firm, Demontfort Professional Wealth Managers in Rugby.

He speaks highly of his time at Demontfort, and praises the way the firm builds and manages its relationship with clients. Demontfort was acquired by Succession in 2016.

Some personal changes meant that Jake needed to slow down and spend more time with his family. He spoke to Tuto directors Kim Bascombe and Tim Eadon, and came on board to help set up the paraplanning side of the business, which evolved into the pension transfer bureau service of today.

Tuto has two divisions; Tuto Money, the principal firm, and Tuto Associates, an appointed representative. It is comprised of an advice business and a bureau service for advisers.

Tuto originally focused its retirement advice around annuity business, but pivoted the business with the dawn of pension freedoms.

Jake became a pension transfer specialist (PTS) at the end of last year, and became a Tuto director earlier this year.

British Steel and the FCA

His introduction to the world of pension transfers came at a significant time for the sector – two and a half years into pension freedoms, and with the poor advice given to British Steel workers beginning to be exposed and unravelled.

Jake is incredulous that the British Steel saga was allowed to happen, given the extent of unregulated or poorly qualified advisers who were dispensing poor pension transfer advice.

In positioning the business around pension freedoms and pension transfers, Tuto understood they needed to work closely with their compliance partners.

Interestingly, Jake says it was their professional indemnity (PI) provider that helped set the parameters when it came to compliance.

“We used Paradigm until this year. At renewal, our PI insurer wanted us to use a compliance firm of their choosing, and they also wanted pre-advice sign-offs, rather than post-advice file checks. That was a cliff-edge change in the way we did things.”

Jake admits while the focus has always been on delivering suitable advice, the level of advice being given now is much more comprehensive.

He firmly believes the role of the PTS goes beyond the recommendation to transfer or not – it’s about retirement planning in the round.

“The advice to transfer is binary – it’s either a yes or a no. But the advice to the client needs to provide much more reasoning as to why a transfer is or isn’t in their best interests. The retirement plan is key to that.

“Advice since pension freedoms has evolved. Initially it was much more transactional, based on software that used critical yields to determine whether it was in someone’s best interests to transfer or not. It’s now about firms like us who are looking at the whole impact: health, longevity, lifetime allowance, inheritance tax (IHT) and cashflow planning in general. Those components form the basis of our advice as to whether a client should transfer or not.”

Last month the FCA published its final rules on pension transfer advice. The regulator concluded a ban on contingent charging was not appropriate (for now at least) and introduced a number of measures aimed at improving the quality of pension transfer advice, including the requirement for all PTSs to hold an investment advice qualification by October 2020.

Jake says the FCA’s latest rules are in some respects playing catch up with what should have been the norm in the first place. But he agrees with the regulator around the nuances of the contingent charging debate.

“The non-contingent versus contingent charging is a difficult one. Almost by definition, non-contingent charging must be the way to go but then again, the FCA can’t be seen to be shutting off access to advice, particularly when you are forcing the general public to take advice because of the £30,000 threshold.”

He understands that contingent charging models have to manage an inherent bias. Tuto has recently introduced a suitability report fee of £1,000, and looks to instil the right ethos with its pay structure (“No one’s take-home pay is contingent on a transfer") and call monitoring.

The client experience is also front of mind for Jake. “At the coalface, it’s very hard for clients. Guidance isn’t enough for them, they want (or perhaps need) advice.

“As a profession, we are trying to do the best for clients in educating them and giving them the information they need to make a decision, but we are so worried that might be construed as advice 10 to 15 years down the line that we end up not helping.”

Jake argues that whether you are offering pension transfer advice in house or whether you choose to outsource, it comes down to having an “unbelievable level of knowledge” of your client.

He advocates that a transfer shouldn’t be seen as a transactional piece of work, and that advisers need to consider the long-term impacts of any transfer as well as the long-term impact of the investment solution.

He says his firm spends as much if not more time on building a drawdown solution as the time spent on whether it’s suitable for the client to transfer or not. “A complaint could arise if the advice to transfer was sound, but what the client has done since then has caused a problem.”

Jake cites a recent case where a transfer was suitable based on the client having other DB schemes, as did his wife. But the client also had an armed forces pension he started taking in 1998, and the compliance review flagged this wouldn’t have been assessed against the lifetime allowance post A-day. While in this case there is an unlikely to be an issue with the lifetime allowance, it shows the level of detail advisers need to be aware of when handling this kind of work.

PI cover: The stark reality

As a pension transfer specialist, Jake understands all too well the struggles of obtaining of PI cover. His experience is that PI insurers are effectively outsourcing the decision of whether to offer cover or not based on the advice of the compliance firms they work with.

As part of the process, Tuto was visited by their PI insurer’s preferred compliance firm, who did an audit of historic business and discussed the firm’s process and ethos when it comes to DB transfers.

Tuto passed the test, but renewal came at a cost.

“Our premiums went up hugely, and our excess went from £10,000 to £35,000. But we were also quoted premiums of £200,000 with a £75,000 excess, which would only have covered us up to £500,000. In those circumstances, you’re very close to self-insuring, because what insurance are they providing?

“I’m hearing from colleagues that you’ve got blanket bans on British Steel, blanket bans on under 55s. I’ve heard one insurer will only allow you to have a limit of 10 members of the same scheme, which I guess is an attempt to stop factory gating. It’s harsh out there. The soundings we’ve got from our PI insurer is they’re happy with the firms they’ve got, but they don’t necessarily want to take on new firms.”

At a glance: Tuto

Company launched: Tuto Money was set up in 2008, Tuto Associates in 2015

Number of clients: We have around 500 private clients, looking after around £50m in assets under advice. Our bureau service caters for around 50 advisers around the country

Number of staff: Between Tuto Money and Tuto Associates, we have 25 members of staff

In a nutshell: DB transfers is a highly complex area of financial planning. Our ethos is all about educating and guiding our clients, be they private clients or the advisers we collaborate with, and helping them through these complexities in a personable way. Service and professionalism are our key drivers.

Jake is concerned PI is going to continue to be a big problem, and worries about the knock-on impact of a tightening market on the availability of advice.

In terms of firm development, Jake is keen to evolve Tuto from solely focusing on pension transfers to become what he calls a “centre of excellence”.

It is working on developing centralised retirement propositions, and on providing outsourcing services for advisers looking at complex drawdown or IHT planning.

“If you compare it to the medical world, you’ve got the GP at the hub and then the spokes out to different specialists.

"Advisers have a great ability to build relationships with their clients and third parties, and manage those relationships. Sometimes firms can dip into specialisms and they don’t have enough time, knowledge or even PI, which can limit that specialism.”

He admits there are limitations with that analogy, in that pension transfer specialists can sometimes be challenged by referring advisers in a way not replicated in the medical sector.

“The only difficulty that comparison has is the GP wouldn’t question the specialist or consultant. Of course there needs to be due diligence and critique where appropriate, but the GP would not assume he knows better than a cancer specialist for example, or recommend a course of action beforehand. That relationship between a specialist and the firm needs to have total transparency and respect for each other’s abilities.”

“The danger with having so few PI providers is that it becomes a closed shop. It’s a sellers’ market at the end of the day, they can charge what they like and impose whatever conditions they like. That is having a significant impact on both advisers and DB specialists.”